Bank rules under fire after losses, scandal

DAVOS: Central bankers meeting in Davos on Saturday said they would review risk rules after the financial crisis blew holes in balance sheets and threatened to tip the global financial system.

Regulators praise the Basel II rules -- which went on-line in Europe on Jan. 1 -- for raising banks' risk sensitivity, but the crisis triggered by the U.S. subprime mortgage crisis has made it urgent to patch weak spots in the accord.

"It's a good time now to review Basel II," Brazil's central bank chief Henrique de Campos Meirelles said after meeting regulators and central bank governors at the World Economic Forum, which has been overshadowed by the market crisis.

Brazil is the chair of the G20 combined group of wealthy and big developing countries this year.

Meirelles said the powerful group would focus on restoring financial stability badly damaged by the subprime crisis.

His calls echo recent comments by European Central Bank President Jean-Claude Trichet who also sought a review of specific revisions in the accord, completed after almost six years of contentious negotiations in 2004.

They also underscore support among regulators to restructure swathes of the regulatory landscape and homogenise standards in a globalised system where sparks in one country can set fire in another. That happened when failed U.S. subprime mortgages brought parts of Germany's banking system to its knees.

Speaking in private, regulators said they are too busy managing the crisis to map out exactly what the long-term changes to the regulatory landscape will be.

"We won't know what to do until the dust has settled," said a source with knowledge of the Basel Committee on Banking Supervision -- the global standard-setter -- and the Financial Stability Forum of regulators and central bankers.

REGULATORY CONSENSUS At that point, banks will face an overhaul to slash business lines, simplify investments and remove incentives that led lightly regulated U.S. mortgage companies to underwrite the bad debt that threw the world financial system into the worst Western banking crisis in generations.

Regulators soundly rejected the idea of some sort of global supervisory authority, but are considering a veritable laundry list of changes, including:

*The role of ratings agencies and the assignment of risk-weighted capital under Basel II, where simpler approaches to the accord allow banks to use credit ratings as a substitute for their own assessments;

*Encouraging homogenised products with standardised characteristics;

*Tougher rules on asset securitisation; *Liquidity regulations and stress testing that will make banks sturdier in the face of violent market turbulence;

*Standardising the characteristics of over-the-counter derivatives and moving trade to electronic platforms.